Pheu Thai Win Will Fuel Inflation: Economists

CNBC.com

Monday, 4 Jul 2011 | 2:17 AM ETCNBC.com

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The decisive win by Thailand's opposition Pheu Thai Party may have removed some uncertainty over the country's political future, but questions remain over the country's economic outlook, analysts told CNBC on Monday.

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Yingluck Shinawatra greets the media before giving a celebration speech at the Pue Thai party headquarters July 3, 2011 in Bangkok, Thailand. Early exit polls put Yingluck, the sister of ousted former leader Thaksin Shinawatra ahead as Thai Prime Minister Abhisit Vejjajiva concedes the election. The apparent election result paves the way for Yingluck Shinawatra to become Thailand's first female prime minister.

Inflation remains a key concern in the next six months, says Santitarn Sathirathai, Thailand Economist at Credit Suisse, fanned by pro-growth policies promised during the campaigning period.

"We have seen a lot of the pre-election policies very pro-consumption, pro-fiscal spending, boosting growth," he said. "We've also seen a large increase in minimum wage - this is probably one of the largest increase in the past 10 years." Click here for full interview.

The Pheu Thai party party - led by Yingluck Shinawatra, the sister of former Thai prime minister Thaksin - has pledged to lift minimum wage by about 40 percent to 300 baht, and up to 1,000 baht by 2020.

"The key thing to watch is how the new government implements the minimum wage policy," Credit Suisse's Sathirathai noted.

While the populist policy will ensure the lowest income segment of the population doesn't get left behind, it could also fuel price rises.

"If there's a parallel shift in wages across the spectrum, then that means that inflation could get worse, not better; you could get second round effects and wage prices spiral fears," said Vishnu Varathan, Asia Economist at Capital Economics. "Bank of Thailand unfortunately has to stay on top of the game and continue to hike rates."

Sathirathai agrees, and expects inflation - which currently stands at around 4 percent - to keep rising for the rest of the year, and that would prompt the central bank to be more hawkish.

"The BOT worries more about strong demand, and inflation becoming more entrenched." he said.

Credit Suisse expects the central bank to hike rates by another 75 basis points (bps) this year, after already raising rates eight times since July last year. The BOT is widely expected to hike rates by 25 bps next week, bringing the benchmark lending rate to 3.25 percent.

The tightening cycle will mean more strength for the Thai currency.

"The Thai baht's longer term strength is very much intact," said Thio Chin Loo, senior currency strategist at BNP Paribas, citing Thailand's strong domestic demand as a factor supporting the currency. "While that continues to hold on for the Thai economy, that will be a supportive factor for the thai baht."

Experts believe the opposition victory will support the stock market, which is up 4 percent so far this year, bolstered by the country's strong domestic growth story.

"Thailand is in a sweet spot right now, so I don't see why we shouldn't be invested there," said Bank Julius Baers' Mark Matthews, "This was the best outcome in the sense that had the Pheu Thai party won the fractional majority. Had the incumbents won it would have been much worse, the red shirts would have been up in arms."Click here for full interview.

"I'm saying buy in sectors that particularly have a lot to do with the domestic economy - banks and property in particular," he added.

Business Reaction

While the business community will be closely monitoring how the Pheu Thai party irons out policy details, they mostly welcomed the election result.

"The good thing is it was a clear majority," said Richard Han, CEO of domestic semiconductor company Hana Microelectronics.

Ford, which has been in Thailand for years and a major force in the Thai automotive industry, was equally positive.

"The first thing we should say, even as a business, is how great it is to wake up here in Bangkok and Thailand, the day after a general election with a terrific turnout, to see a fully functioning democracy in place," Peter Fleet, president of Ford ASEAN told CNBC.

But the reaction was mixed with regards to the impact of the minimum wage hike.Hana Microelectronics' Han said it was an issue that concerned many businesses.

What Does Pheu Thai's Victory Mean?

Richard Han, CEO of Hana Microelectronics says Pheu Thai's victory at the polls will be good for the Thai baht, but it might hurt the country's export market.

"A 30 percent increase is beyond what most businesses can absorb immediately," said Han. "The issue here is not so much there shouldn't be an increase in minimum wage, it's the speed at which they should come in," he added, pointing out that productivity was the main concern.

"If the rise in wage costs go very quickly, companies cannot adapt to it in terms of increasing their productivity at the same pace," he added, warning that the development could cause an inflationary spiral, prompting higher interest rates which would be negative for business.

Higher wages could also put Thailand at a competitive disadvantage. "Even though we are a local business, we are part of the export story and Thailand has to be competitive on an export basis. We compete in a world market. And if minimum wages rise beyond what is going to happen in other countries, we then become less competitive, then that may be a problem for us," Han said.

On the other hand, Ford - which employs about 40,000 people in Thailand - does not expect to be significantly impacted by the increase.

"The Thai automotive industry, in terms of assembling vehicles, is now the twelfth largest in the world, and it's well on track to become the tenth. I can't see any kind of government that's going to want to derail that kind of momentum," Fleet said.